A world full of debts

Has the world always been full of debts? Not as much as now. Economists have tried to convert the GDP of the world in different moments of the history in current dollars just to have an idea of how big a certain country was and how developed was the international commerce in some periods of the history. They haven’t done the same with the debts of the world. We are pretty sure, that the world today is more indebted than ever.

Is it all because of Keynes? Certainly Keynes’s ideas have had a very big influential in the mind of many politicians and economists. The development of the financial engineering has help very much on that. The banking system has been also very important on creating private debts through different products, like credit cards and consumption credit. The result is that today, the world sits above $200 thousand billions of private and public debts.

Is it too much? It’s more than 280% of the world’s GDP. It’s true that this debt has created economic growth above the real potential in the past, but now it’s an obstacle for the families, companies and countries. The debt level changes from country to country but is becoming a problem both in the developed countries than in the developing countries. The private and public debt in the US is around 260% of the GDP a little less than the average but too big respect to the national savings. In China, it’s 280% of the GDP. The records are maintained by Spain and Japan. In these two countries the total debt are respectively 400% and 520 % of the GDP.

The main problem is that, all this debt is not always hold by people, companies and governments that can afford the payment plan. So this debt not only is an obstacle for the economic growth but in case of failure of a company or country too big to fail, it can cause a global tsunami in the financial system. Only in the last fifteen year we had a lot of cases of failure of which: in 1998 The Long term capital management fund, in 2008 Lehman Brothers, in 2010 we had the Greece. And in each of these cases the global financial stability was in doubt. Now economists expect bad surprises from Japan and China.

Nobody knows where the point of no return is, but many of us, are now pretty sure, that the world is close to the limits.